RSS | Astrid Dannenberg: Coercive Trade Agreements for Supplying Global Public Goods
Astrid Dannenberg, Professor of Environmental and Behavioral Economics at the University of Kassel, will be the speaker for this seminar.
We develop a model of cooperation on trade and (in keeping with the Paris Agreement) of voluntary cooperation on climate change, and ask whether it is better to keep these issues separate or to link them, by making cooperation on trade conditional on supplying the global public good of reducing greenhouse gas emissions.
Nordhaus (2015) has shown that, depending on the social cost of carbon and tariff level, linkage may enable countries to cooperate fully on both trade and climate change, or it may only sustain partial cooperation on both issues, or it may be of no help at all. However, his approach is numerical, and conceals the full nature of the games being played. He also assumes that all countries commit not to retaliate against members of the “Climate Club” that impose punitive tariffs on non-members.
Our simple model, by contrast, reveals the full nature of the linked game and the consequences of this assumption about retaliation. We show that if retaliation is prohibited, then linkage gives rise to four possible situations (for any given set of parameter values, only one of these situations will exist): a cooperation game, a coordination game, a chicken game, or a prisoners’ dilemma. By contrast, if retaliation is a choice, linkage gives rise to one of only two possible situations (again, depending on parameter values): a coordination game or a prisoners’ dilemma. We also find that the conditions that enable linkage to increase cooperation on climate change are more restrictive than suggested by Nordhaus. Moreover, we show that even when linkage could improve climate cooperation, its adoption is not assured, because the payoff dominant Nash equilibrium of the coordination game cannot also be risk dominant. This in turn means that the procedure for determining whether to link is crucial.
In Nordhaus’s paper, the decision to link is made by a computer algorithm. Our paper studies this choice in the lab. Our experiments focus only on the restricted set of circumstances in which linkage could be helpful, given the threat of retalitation. We find that if there are no rules for linking cooperation on trade to cooperation on climate change, then linkage can be risky and could spark a trade war, making countries worse off compared to a situation in which linkage is prohibited. A procedural rule that incorporates linkage in a new agreement avoids a trade war. Such an agreement may fail to be adopted, but if it is adopted then cooperation on climate change will be achieved without undermining cooperation on trade.
This seminar is open to all LSE staff and students. If you are from outside the LSE and would like to attend, please email Gri.Events@lse.ac.uk to register for a place.